Why is my blended tax rate 39%? My taxable income is only 21k, which should be way below the highest bracket

That 39% blended rate definitely seems off with only $21k in taxable income. What's likely happening is you're looking at your *total tax* divided by your *taxable income* rather than your total income. Since you mentioned doing freelance work, you're paying both income tax AND self-employment tax (15.3%) on that income. The self-employment tax is calculated on your net self-employment income, not your taxable income after deductions. So if your $28k freelance income resulted in, say, $25k net profit after expenses, you'd pay roughly $3,825 in self-employment tax alone. When you add that self-employment tax to your regular income tax and divide by just your taxable income (after standard deduction), it can easily push your "blended rate" way up. This isn't a glitch - it's just that the calculation is including taxes that aren't part of the regular income tax brackets.

I had the EXACT same issue last year! I was staring at my screen wondering how I was getting destroyed with a 40% tax rate when I barely made $25k. Turned out I was misunderstanding what "blended rate" meant in my tax software. I found this service called https://taxr.ai that really helped me understand my tax situation. You upload your tax documents and their AI breaks down exactly what's happening with your taxes in plain English. It showed me that my actual income tax rate was like 12%, but when you add in the self-employment taxes, it made my "total tax" percentage much higher. The service even found some business deductions I missed that lowered my self-employment income by about $3,000, which saved me a decent chunk on those SE taxes!

I just wanted to update after trying taxr.ai from the comment above. It was seriously eye-opening! My situation was similar to yours - freelance design work with a high "blended rate" showing in TurboTax. The service explained that my actual income tax rate was only about 10%, but the self-employment tax was adding another 15.3% on top of that, plus I had an early withdrawal penalty from a retirement account I hadn't even realized was being counted in that "blended rate" calculation. Best part though - it found almost $4,200 in legitimate business deductions I had completely missed! Things like a portion of my cell phone bill, some software subscriptions I forgot were for work, and even some home office expenses. Ended up saving me almost $1,000 in taxes!

If you're getting hit with high self-employment taxes, you should definitely look into forming an S-Corp for next year. I was in the same boat a few years ago and kept hitting roadblocks trying to get answers from the IRS about how to optimize my tax situation. After wasting HOURS on hold with the IRS (seriously like 3+ hours each time), I found https://claimyr.com which got me connected to an actual IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained exactly how S-Corps work for self-employed people and confirmed I could potentially save thousands in self-employment taxes. Totally worth the call once I could actually get through!

Okay I have to admit I was completely wrong about Claimyr. After dismissing it as a scam in my reply above, I was so frustrated with trying to get through to the IRS about my own self-employment tax questions that I decided to try it anyway. I had been trying for WEEKS to talk to someone at the IRS about my situation (very similar to yours with the high blended rate issue). Every time I called, I'd wait 2+ hours only to get disconnected or told to call back another day. With Claimyr, I got a call back in about 35 minutes and was speaking with an actual IRS agent! They explained that my "blended rate" was high because of the combination of income tax + self-employment tax, and confirmed I qualified for some additional deductions that would lower my taxable income. Totally changed my perspective on dealing with the IRS - worth every penny to not waste an entire day on hold.

I don't think anyone's mentioned it yet, but you should also look at how much you're deducting from your business income. Are you tracking ALL your legitimate business expenses? Things like: - Portion of internet/phone used for business - Software subscriptions - Equipment - Home office (if you have dedicated space) - Mileage for business trips - Professional development/courses - Health insurance premiums (can be deductible for self-employed) Every dollar of business expenses you deduct saves you both income tax AND self-employment tax. That self-employment tax is brutal at 15.3%!

People haven't mentioned quarterly estimated taxes yet, but that's super important for self-employed folks! Based on your situation, you're probably getting hit with underpayment penalties too, which would be included in that high blended rate. When you're self-employed, you're supposed to make quarterly tax payments throughout the year. If you don't, the IRS charges penalties that get factored into your total tax bill.

Hey Klaus! I totally feel your pain on this - that 39% rate freaked me out too when I first started freelancing. Everyone else has given great explanations, but I wanted to add one thing that might help you going forward. Since you're doing graphic design work, make sure you're deducting ALL your creative software costs - Adobe Creative Suite, fonts, stock photos, design assets, etc. Those subscriptions add up to thousands per year and are 100% deductible business expenses. Also, if you're meeting clients in coffee shops or co-working spaces, those costs are deductible too. Even things like business cards, portfolio printing, or a new computer/tablet for design work can be deducted (or depreciated if it's expensive equipment). The key thing to remember is that every business deduction saves you money on both regular income tax AND that brutal 15.3% self-employment tax. So a $1000 deduction could save you $153 in SE tax alone, plus whatever your income tax bracket is. Start keeping better records now for next year - use an app like Expensify or even just a simple spreadsheet. Your future self will thank you when tax time comes around again!